Friday, November 30, 2007

Perspective on Venture Investments

Thanks to Fred Wilson Managing Partner at Union Square Ventures for the transparent post on his investment track record in early-stage venture deals. Though Fred’s foci is in software and web-based technologies I feel comfortable stating, from what I have seen, heard, read, etc. that life science managing directors and partners approach current and potential limited partners with a similar expectation set. That is typically 1/3 of a funds investments will fail, 1/3 will under-perform expectations, and 1/3 of the investments will meet expectations, that is where meeting expectations means a 5X to 10X return.

To break it out assume:

1/3 Average 7.50X – 2.50X
1/3 Average 2.00X – 0.67X
1/3 Average 0.00X – 0.00X


Therefore as an entrepreneur when seeking venture dollars it is of paramount importance to ‘know your audience’ before giving your pitch. That is if your perceived exit opportunity is only 2-3X understand that despite having a potentially very sound business architecture and/or low risk opportunity that such a deal may not be attractive to some venture funds because it is an investment that may not sufficiently/effectively ‘move the needle’ for the fund.

Recall this very important point: VC’s have a fiduciary responsibility to the funds limited partners, that is the individuals or institutions whose dollars are being managed by the director or partner.

Because drug development is riddled with numerous and unique risks it is not uncommon these days for institutional dollars to come in later in the development life of a therapeutic and thus makes for a challenging endeavor for an early-stage life science entity to raise its first round of professional investment. However, if there exists unambiguous established and owned intellectual property, a clearly superior technology and management with substantial industry experience, then such value will be recognized by the investment community and a term sheet will undoubtedly be on its way.

The challenge here is the necessity to amass all of the requisite elements for the convergence of such a perfect storm; that is IP, technology and management. So what to do if one or more of these elements is missing? The answer is simple, contact Fitzsimons BioBusiness Partners, an entity that functions as a node where appropriate connections are facilitated and efforts to package investable life science companies are made daily.

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